AOL Picks Up Pace, But Still Well Behind Rivals

Time Warner’s troubled America Online is slowly turning its fortunes, posting an improvement in ad revenue and profitability, according to last week’s first-quarter earnings report. But those looking for the kind of rebound that competitors Yahoo! and MSN have seen will have to wait a little longer.

Q1 revenue for AOL—which also includes nonproprietary services such as and—was flat compared with the same period last year at $2.2 billion. Ad revenue was down 5 percent, which the company attributed to the expiration of multiyear ad deals signed during the dot-com heyday and a $31 million reduction in intercompany revenues.

On the plus side, ad revenue was up sequentially, rising 5 percent from $204 million in the fourth quarter to $214 million. Operating income before depreciation and amortization was up 21 percent, due mostly to cost-cutting.

While that performance prompted TW chairman and CEO Dick Parsons to declare the property undervalued in a conference call with analysts last Wednesday, others were less upbeat.

AOL’s modest ad-revenue performance would have been “fine” one or two years ago but doesn’t stack up when compared to the industry increases of today, said Forrester Research senior analyst Jim Nail. Yahoo! saw its marketing-services revenue jump 235 percent in the first quarter to $635 million compared to the year-earlier period, while Microsoft’s MSN reported a 43 percent ad-revenue increase to $333 million.

The three Internet service providers had comparable reach during the week ended April 19, but at-home users spent at least twice as much time on TW properties as they did on the other two, according to Nielsen/NetRatings. Mike Kelly, appointed in January to lead ad sales in the new role of president of AOL Media Networks, said last week that while AOL is behind in leveraging the popularity of its properties, it is making progress.

“We’re really ahead of the market in terms of programmed environments for advertising,” he said.

Last Thursday, Deutsche Bank raised its 2004 ad-revenue forecast for AOL to $873 million, up 11 percent for the year. Asked on the analysts call to give greater detail on internal projections for AOL, Don Logan, chairman of TW’s Media and Entertainment Group, hedged. “We’re going to get our fair share of the advertising growth,” he said.

Media executives pegged hints of an AOL ad-sales turnaround to two factors. The service will be completely HTML-based by year’s end, which will bring AOL in line with its chief competitors in the areas of production, optimization and tracking, essential for online advertising. Onetime Entertainment Weekly publisher Kelly is also seen as a boon. So far, his biggest move has been to streamline the sales organization, which at one point was so diffuse that dozens of internal steps could be required to do an ad deal.

“My impression is that Mike’s been working hard at the basic stuff,” said Peter Gardiner, partner and chief media officer at Interpublic Group’s Deutsch in New York.

Greg Smith, evp and director of media practice at Aegis Group’s Carat Interactive in New York, said, “We’ve heard rave reviews about Kelly—that he’s listening to people both internally and externally.”

Still, Smith underscored what may be the service’s biggest battle: convincing advertisers that going with AOL is as necessary as buying MSN and Yahoo! Kelly said most advertisers are willing to do business with all three and that AOL’s ad business would soon match its audience. “Are we as easy to work with as the other two guys? Not yet,” he admitted.